Is First Trust Materials AlphaDEX ETF (FXZ) a Strong ETF Right Now?
Designed to provide broad exposure to the Materials ETFs category of the market, the First Trust Materials AlphaDEX ETF (FXZ) is a smart beta exchange traded fund launched on 05/08/2007.
What Are Smart Beta ETFs?
For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.
Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.
There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.
Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.
Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.
Fund Sponsor & Index
Because the fund has amassed over $1.72 billion, this makes it one of the larger ETFs in the Materials ETFs. FXZ is managed by First Trust Advisors. Before fees and expenses, this particular fund seeks to match the performance of the StrataQuant Materials Index.
The StrataQuant Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology.
Cost & Other Expenses
For ETF investors, expense ratios are an important factor when considering a fund's return; in the long-term, cheaper funds actually have the ability to outperform their more expensive cousins if all other things remain the same.
Operating expenses on an annual basis are 0.61% for FXZ, making it on par with most peer products in the space.
It's 12-month trailing dividend yield comes in at 1.69%.
Sector Exposure and Top Holdings
It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
For FXZ, it has heaviest allocation in the Materials sector --about 93.20% of the portfolio.
Looking at individual holdings, Cleveland-Cliffs Inc. (CLF) accounts for about 5.50% of total assets, followed by Nucor Corporation (NUE) and Steel Dynamics, Inc. (STLD).
The top 10 holdings account for about 44.46% of total assets under management.
Performance and Risk
The ETF has added roughly 7.75% and is down about -7.16% so far this year and in the past one year (as of 04/13/2023), respectively. FXZ has traded between $50.77 and $74.60 during this last 52-week period.
The ETF has a beta of 1.26 and standard deviation of 28.71% for the trailing three-year period, making it a medium risk choice in the space. With about 40 holdings, it has more concentrated exposure than peers.
Alternatives
First Trust Materials AlphaDEX ETF is a reasonable option for investors seeking to outperform the Materials ETFs segment of the market. However, there are other ETFs in the space which investors could consider.
Materials Select Sector SPDR ETF (XLB) tracks Materials Select Sector Index and the FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR) tracks Morningstar Global Upstream Natural Resources Index. Materials Select Sector SPDR ETF has $5.56 billion in assets, FlexShares Morningstar Global Upstream Natural Resources ETF has $7.62 billion. XLB has an expense ratio of 0.10% and GUNR charges 0.46%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Materials ETFs.
Bottom Line
To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.
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First Trust Materials AlphaDEX ETF (FXZ): ETF Research Reports
Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
Nucor Corporation (NUE) : Free Stock Analysis Report
Cleveland-Cliffs Inc. (CLF) : Free Stock Analysis Report
Materials Select Sector SPDR ETF (XLB): ETF Research Reports
FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR): ETF Research Reports
